George W Bush's willingness to privatise Social Security may be the best chance of reducing
spending

http://www.jewishworldreview.com --
BOTH AL GORE and George W Bush are spending the crucial last
days of the US presidential race campaigning against big
government. Mr Bush swears he will shrink the government. So
does Mr Gore, who has committed to cutting federal spending to
the smallest share of the economy in 50 years.

But living up to these promises would be a feat. Back in 1950,
the year to which Mr Gore must be referring, revenues were
14.4 per cent of gross domestic product. Since then, through
Republican presidencies and Democratic ones, that proportion
has increased inexorably, so that today the federal government takes in more than 20 per
cent of GDP. A big blob of a budget may seem simpler to cut. But not in America's case.
Indeed, with every year that passes the budget becomes harder to trim.

This is so not merely because fat-and-happy Americans have grown accustomed to their
entitlements. The main obstacle to cutbacks lies in a seemingly marginal aspect of US budget
law itself. Call it the autopilot problem.

This problem starts because the law divides spending programmes into two classes. The
first class is mandatory entitlement programmes, including Social Security, the public pension
plan and Medicare, the retiree health programme. The mandatories need no renewing. This
alone practically guarantees their survival. Of course, lawmakers could make entitlements
annually renewable. But that would require a challenging rewrite of the budget law, as well
as the political courage to admit the possibility of future programme cuts. And Washington is
not the Capital of Courage. It is the Capital of Inertia.

The second category is discretionary spending, which includes projects such as defence.
Discretionary programmes live a perilous life. They must be renewed each autumn, or they
vanish. Defence, for example, got whacked as soon as the cold war ended.

Still, the overall mandatory-discretionary ratio might remain constant but for an additional
detail: the chief mandatories feature inbuilt growth formulae. In the case of Social Security,
demography causes part of the trouble - like continental Europe, the US will face
unsustainable obligations when its baby-boomers retire. And the pension system makes
things worse by pegging the base pension payment of new retirees to real increases in
average US wages, rather than to inflation, as in Britain. Medicare grows because it
remains, in spite of reforms, an open-ended programme. The more retired people there are,
and the more treatments, the more Washington pays.

C Eugene Steuerle, a scholar of the autopilot and a senior fellow at the Urban Institute, points
out that it took lawmakers an embarrassingly long period to become aware of this trend.
Why? Because, as recently as the early 1960s, Congress still enjoyed considerable
leeway. Two-thirds of its tax take, excluding interest, fell into the discretionary category.
Today that relationship has reversed, with two-thirds of the budget going to the
mandatories. A few decades hence, eight out of 10 federal dollars will be committed - and
so on, towards zero.

So where does that leave the candidates' promises to slay big government? Mr Steuerle
recommends periodic review of all legislation: no more holy mandatories. Neither candidate
has taken up this cause - a telling omission. But what about trying to cut the government on
the revenue side? Both candidates advocate tax cuts, the classic method for shrinking
government. But Mr Gore's cuts are targeted for social purposes, not for revenue or
macroeconomic effects. They would not change the autopilot. Mr Bush's cuts are bigger and
he says they will yield smaller government and higher growth. But because Mr Bush is
probably right on the second point, he may be wrong on the first one. In the US experience,
tax cuts have often generated both growth and revenue. The 1990s capital gains rate cut,
for example, helped the government to move into surplus. Mr Bush's cuts may have the
same effect, providing fresh revenue streams for entitlements.

Another way to shrink government is to take on the entitlements themselves. Mr Gore does
tackle Social Security: he wants to patch up the old programme. This may work in the short
run but it does not defuse the demographic time-bomb. And a "reformed" Social Security
programme makes it even less likely that Congress will tackle the autopilot, leaving Mr Gore
little room on the discretionary side to make good on his radical small government promise. Mr
Bush, by contrast, wants to privatise a share of the pension plan by allowing workers to
direct some Social Security payments into individual accounts.

In the long run privatisation could alleviate the autopilot problem. It resets the underlying
entitlement formula: government would owe less to retirees, who would have their own
private pensions as compensation. The change will work only if voters accept smaller public
pensions in future, something they were never ready to do before. Even Ronald Reagan did
not dare to rewrite Social Security. But America may be ready for change: more than half of
citizens hold stocks, an enormous increase since the Reagan years.

If voters want to know which candidate is the bigger Small Government man, they must look
beyond the last-minute pledges. The answer is probably Mr Bush, if only because he has
taken on the Social Security issue. Mr Bush's critics argue that he is only marginally more of
a cutter than Mr Gore. But then, as the incremental increases of the autopilot problem show,
what happens on the margin can make a
difference.

10/30/00: Canada beating America in financial sensibility10/26/00: When progressiveness leads to backwardness10/24/00: The most accurate poll10/19/00: The Middle East tells us the hawks were right 10/17/00: The split personalities of America's super rich 10/10/00: 'Equity Rights' or Wake up and Smell the Starbucks10/04/00: Trapped in the basement of global capitalism09/21/00: The final act of a grand presidential tragedy09/21/00: Europeans strike back at the fuel tax monster. Should Americans follow?09/18/00: First steps to success09/13/00: America rejects the human rights transplant09/07/00: Minimum wage, maximum cost09/05/00: Prudent Al Gore plans some serious spending08/31/00: A revolution fails to bring power to the people08/28/00: A reali$tic poll08/21/00: "I Goofed" 08/16/00: Part of the union, but not part of the party
08/09/00: Silicon Alley Secrets08/02/00: Radical Republicans warm up for Philadelphia07/31/00: I'll Cry if I Want To07/27/00: Cold warrior of the new world07/25/00: The Estate Tax will drop dead07/18/00: Shooting down the anti-missile defence myths07/14/00: A convenient punchbag for America's leaders07/07/00: How to destroy the pharmaceutical industry07/05/00: Patriots and bleeding hearts06/30/00: Candidates beware: New Washington consensus on robust growth stands the old wisdom on its head06/28/00: White America's flight to educational quality06/26/00: How Hillary inspired the feminist infobabes